If there were doubts about the seriousness of the situation facing Europe with gas supplies, as a result of Vladimir Putin’s war against Ukraine, they will have been dispelled on Thursday morning by the German economy minister.
Robert Habeck warned German businesses and households alike that they could face a harsh winter and that petrol rationing could be just around the corner.
His warning comes only nine days later Russia cut the amount of gas it sends to Germanythrough the Nord Stream 1 pipeline that runs under the Baltic Sea, at only 40% of normal levels.
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Mr Habeck’s response was to announce that Germany goes to phase two of its national gas emergency plan in three stages.
Germany moved into the first stage of the plan in late March, which includes tighter control of gas flows and a focus on filling gas storage facilities. But under announced second-stage “alarm” measures, the country will now look to encourage industrial users to save gas as winter approaches, while the government will also spend €15bn (£12.9bn) million) to support an increase in gas storage.
A third “emergency” stage would see gas rationed, in the first case for industrial users but potentially, over time, for households. In such circumstances, households would be designated as “protected clients”, along with hospitals, inpatient care facilities and facilities for the care and support of persons with disabilities, along with the armed forces, the police service and the firemen.
Habeck said Germany’s gas storage facilities were currently 58% full, more than at this point last year, but warned that if Russian supplies via Nord Stream 1 remained at current depressed levels, it would be hard to reach the 90% target that the country’s government was aiming for by November 1 as winter approaches.
they were just 30% full when, at the end of February, Russia first attacked Ukraine.
Habeck said: “It is summer, but winter will come. It will be a rocky road that we will have to travel as a country.”
“Even if we don’t feel it yet, we are in a gas crisis. As of now, gas is a commodity that is in short supply. Prices are already high and we have to count on more increases.”
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Significantly, however, Habeck did not proceed with another aspect of phase two, under which utilities can pass on higher energy prices to their customers with the aim of depressing demand to prop up supply.
This requires approval from the Bundesnetzagenture, the German state regulator for gas and electricity, which was not requested today.
Habeck also tried to downplay concerns about possible gas rationing for industrial users. When asked when this might happen, he replied, “I hope I never [but] Of course I can’t rule it out.”
Today’s measures are not the only ones being implemented by Germany as it seeks to avoid an energy crisis this winter.
The country is also pushing through legislation that would temporarily allow reopen idle coal power plantssomething that would have recently been anathema to Habeck, a member of Germany’s Green Party.
He said: “This is painful: coal-fired power plants are just poison for the climate. But during a transition period, we have to do it to save fuel and get through the winter.”
Things may still get even more painful for him and his party. Germany may also have to back down on plans to shut down its remaining nuclear power plants, a move introduced after the 2011 Fukushima disaster by Angela Merkel, the former German chancellor. That would be really distressing for the green movement, which was born in the anti-nuclear protests of the 1970s.
Habeck also made it clear who he thought was to blame: “We must not fool ourselves. The gas supply cut-off is an economic attack on us by Putin.”
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That Germany, Europe’s largest economy, is already suffering as a result of high energy prices is beyond doubt.
Its economy contracted 0.2% during the first three months of the year and remains slightly below where it was in the pandemic. The most recent data is also far from encouraging. The inflation rate, in this of the most inflation-conscious countries, reached 7.9% in May and is expected to increase in the coming months.
This is already having an impact on consumer spending: retail sales fell 5.4% month-on-month in April, although that may change when this month’s figures come in as Berlin recently introduced gas tax cuts. and the diesel on the line those introduced to the UK by Chancellor Rishi Sunak.
But Germany’s mighty industrial sector, the engine of the eurozone economy, is also failing.
Key industries, particularly auto manufacturing, were already buckling in the face of shortages of key components, particularly microchips, due to global supply chain restrictions made worse by a wave of COVID restrictions this spring in China. But economists believe that pressure on energy-intensive industrial users to reduce their gas consumption is likely to have an impact on industrial production and, by extension, German GDP during the second half of the year.
Eric Heymann, senior economist at Deutsche Bank, told clients on Thursday: “In the event of a significant gas shortage (not yet the case), a recession in German manufacturing could not be avoided. In addition, the risk of recession for the German economy as a whole would increase significantly”.
That may already be happening. The chief executive of BASF, the world’s largest chemical company and a benchmark for German industry, warned on Wednesday that it faces a “considerable recession” in the second half of the year. He is reportedly already making plans for which factories he would have to close first in the event of gas rationing.
Its smaller rival, Lanxess, is also said to be working on similar proposals. Meanwhile, other industrial users are scrambling to shore up renewable energy supplies to make up for any shortfalls created by gas rationing.
Meanwhile, Purchasing Managers’ Index (PMI) ‘flash’ survey data released on Thursday suggested that German manufacturing output is already contracting, with German business confidence back to levels last seen at the start. of the pandemic.
The PMI data is usually a good indicator of what the final result will be for GDP. It is not a good omen.